The purpose of this research is to identify, early in development, characteristics of children that predict problem behaviors at school age. Young children's interactions with other children were examined because problems in peer relations are good predictors of later social-emotional problems and psychiatric disorders. Forty-eight children of depressed and well mothers were observed and assessed using naturalistic and experimental procedures, at age 2 and again at age 5. At age 6 psychiatric assessments were made. Significant age changes, as well as continuity over time, were identified in children's aggression, affect and social skills. The social skills of children of well mothers increased with age. The peer relations of children of depressed mothers were compromised: they showed negative emotion, lack of frustration tolerance, social deficits and little involvement in the environment. Early deficits in modulating emotions in social relationships may precede more formal manifestations of psychiatric problems in children, and thus may serve as early marker variables.